Imax Corp (IMAX) 2012 Q3 法說會逐字稿

Good day, and welcome to the IMAX Corporation Third Quarter 2012 Earnings Conference Call. All participants are currently in a listen-only mode. Following the presentation we will conduct a question and answer session. (Operator Instructions). Today's conference is being recorded. At this time, I would like to turn the call over to Ms. Teri Loxam, Vice President of Investor Relations. Please, go ahead.

Thanks, Michelle. Good morning, everyone. Thanks for joining us on today's Third Quarter 2012 Conference Call. Joining me today is our CEO, Rich Gelfond ; our CFO, Joe Sparacio; and Rob Lister, our Chief Legal Officer. Also here today is Greg Foster, our Chairman and President of Films Entertainment, who will be joining us for the Q&A portion of the call. I would like to remind you of the following information.

Our comments and answers to your questions on this call may include statements that are forward-looking, and that they pertain to future results or outcomes. Actual future results or occurrences may differ materially from these forward forward-looking statements. Please refer to our SEC filings for a more detailed discussion of some of the factors that could affect our future results and outcomes. During today's call, references may be made to certain non-GAAP financial measures as defined by Regulation G of the Securities and Exchange Commission. Discussion of management's use of these measures and definition of these measures, as well as reconciliation to adjusted EPS, adjusted EBITDA, as defined by our credit facility and free cash flow are contained in this morning's press release. The full text of our third quarter earnings release, along with supporting financial tables, is available on IMAX.com. Today's conference call is being webcast in its entirety on our website. With that, let me turn the call over to Rich Gelfond.

Thanks, Teri. As you all know, we've significantly evolved over the past five years. As we sit here today, I see a IMAX at an inflection point between a company that has spent the last few years building and proving out a business model to a global enterprise that has created a differentiated product and global brand. We believe we have positioned ourselves to produce recurring revenues and cash flows, and drive long-term growth. We have achieved sufficient scale, so that we now are able to evaluate our film performance as an annual portfolio.

The scalability of our business is also evident in our network side where adding incremental theaters results in margin expansion in our P&L. In sum, we are no longer simply a title-to-title, theater-to-theater story, but rather a network growth, recurring revenue growth company.

Our third quarter results are strong evidence that IMAX's evolved business model provides increasing top and bottom line growth. During a time when the movie industry suffered a down quarter at the box office versus last year, IMAX's global box office was up 16%, and our year-to-date box office is up over 45%. IMAX's third quarter revenues of $81 million grew 21% versus the same period last year driven by continued growth in our recurring revenues, as well as revenues from sales-type theater installation. The adjusted EBITDA increased by 59% to $34 million, and adjusted EPS of $0.26 grew by 86% versus the same period last year.

Even in a quarter in which the overall box office potential may not have lived up to expectation, we demonstrated not only decent top line growth, but more importantly, translated that into strong bottom line growth, as well. A key driver of our growth story is expanding our network, and we continue to see significant demand for new IMAX screens in regions around the world. This quarter we installed 28 new theater locations, in a number of locations, globally, including China, India, Russia, Egypt, Ecuador, and Kazakhstan to name a few. We also signed deals this quarter for 41 IMAX theaters, and our pipeline for future theater deals continues to be robust.

Let's spend a few moments going through our progress in each region. We've continued to see additional interest in the domestic market for new, as well as from existing partners, with a number of signings in North America this quarter. In fact, two of our largest partners, AMC and Regal, signed on to install additional IMAX theaters on the same terms as our existing JV agreements. AMC signed on for a firm eight additional IMAX theaters with the potential for ten more on top of that, and Regal signed on for another ten sites.

In addition Guzzo, one of our Canadian partners, signed on for another three theaters. Having this level of continued demand from our existing partners shows just how much value an IMAX theater brings to exhibitors.

In greater China, we installed 14 new theaters in Q3 bringing our total commercial network to 92 at the end of September, with almost half now being joint ventures. We're in business with over 15 exhibitors in China, and we continue to see high levels of demand for new IMAX theaters in the region. And IMAX continues to be a top choice for people's entertainment dollars in China.

I was in China in September. I was again impressed by the level of brand awareness and excitement for IMAX. The decision by China Film Bureau to play The Dark Knight Rises at the same time as The Amazing Spiderman did impact the performance of both titles, but my sense from the trip is that the intent of China Film Bureau was to free up more slots for Chinese movies. In my opinion, the unintended consequence of lower [haul] at box office may give China pause to rethink this strategy longer-term. China will likely continue to impose blackout periods at various times in the year. However, we have been proactive about developing strategies to maximize our theater performance in China, such as the recent deal with high profile film producer, Huayi Bros., for four local language films to play in the back half of this year.

China is an important growth region for us, and we're pleased with the progress we continue to make there. But our international story is not only about China. We have also continued to make progress in Europe. Earlier this year, we brought on board Andrew Cripps, former president of Paramount International and UPI, to manage this region, and his experience and connections have already been paying off. We've installed 11 new theaters this year in Europe, including Russia; and we've signed deals for 14 new theaters in Europe this year, as well.

We're encouraged by the performance of some of our new theaters in the region, especially the UK, where our first screen average has been $1.5 million year-to-date.

In India, we signed a film deal for the first Bollywood title. As you know, about 90% of India's box office is driven by Indian language films, so the release of Doom 3, from Yash Raj Films next winter, will be an important proof of concept for us. In fact, at Thanksgiving this year, I'm going to India for about ten days to try and follow up on that activity.

We currently only have four theaters open in India, with another nine in backlog, but we believe this region represents a considerable opportunity for IMAX in the longer term.

Moving on to Latin America. This is a region that has not progressed as quickly for us as I would have hoped. However, it's a region with significant potential growth for IMAX, so we are taking important steps to increase penetration. We currently have 19 commercial theaters open in this region, and they've been performing very well. As we've seen in other regions, having strong reference theaters can help catalyze our growth.

To leverage this momentum, we have increased our business to the region, building relationships and talking with exhibitors, as well as real estate developers. We believe these efforts will start to pay off in a bigger way in 2013.

Turning to our film slate, we'll have more than 30 films playing across our network this year, including some local language content, which is about the number of films we expect to have in our portfolio each year going forward. We've announced ten films for 2013, however, the majority of our titles have been selected, and we are just working through the final stages of discussions with the studios.

We see the slate for 2013 as a strong portfolio of films for IMAX that are well-spaced throughout the year, as you know, an important point. We're excited that several films next year will have IMAX DNA, included in them, such as Star Trek, and The Hunger Games sequels, portions of which are being filmed with our cameras, and Oblivion, which was filmed to specifically take advantage of our enhanced aspect ratio, under which we will have an IMAX early release in April. We have found that movies that leverage IMAX's differentiation, whether they are shot with our cameras, or especially filmed for our unique aspect ratio, tend to drive higher box office results for us, as well as for our exhibitor and studio partners.

Good examples are The Dark Knight Rises, which has grossed over $110 million in IMAX, and Mission Impossible 4, which helped reinvigorate that franchise. As a result, we've seen an increase of demand from studios and filmmakers to incorporate some IMAX DNA into their movies. In fact, director Sam Mendes, of Skyfall, was originally going to present only part of the movie in our unique aspect ratio, but after seeing the IMAX footage decided to utilize our aspect ratio throughout the entire movie. As you can see, we have a lot of positive momentum at the Company.

We continue to install theaters at a good pace and demand for new IMAX screens continues to be strong. We feel very good about the health and fundamentals of our business, and we're committed to continuing to take steps to maximize our long-term growth.

Before passing over to Joe, I want to spend a few moments highlighting a few changes that you should expect on the communications front going forward. As I mentioned before, we have evolved as a company over the past few years, and we are now at a point where we have scale in our film slate, as well as scale in our network.

We're rounding a corner toward what we believe will be a period of long-term growth. In line with this evolution, we've decided to take a hard look at the metrics that we report, and we plan to evolve our communication strategy to focus on a smaller number of key items that we think will help long-term investors assess how we are doing each year. We recognize that there will always be quarterly volatility in this industry. While we still pay attention to the quarters, we'll [be] focusing on annual metrics is the best way to measure our long-term growth and the value we bring to shareholders.

To that end in the press release this morning, we issued updated 2012 and 2013 installation guidance under a new definition. In the past, we had guided installs only at a backlog. From now on, we'll give you our best estimate of the total number of installations we expect each year including from backlog, as well as new sign and installs. This will be an annual number.

We do not intend to update this guidance each quarter unless there is a material change.

In addition, for our new signings, you should expect that we will send out press releases for the larger deals, but we do not intend to press release all of the smaller deals. We'll make sure that we provide you with additional color on new theater demand during our quarterly earnings calls.

We are also evaluating the most appropriate metrics related to box office performance. Beginning next year, we're we do not intend to issue mid-quarter updates. In our view, there is minimal predictive value in these updates, as there is variability each quarter in the timing of movie release dates. For example, in the fourth quarter this year Bond and The Hobbit are back loaded towards the and of the quarter. And in line with the change we made last quarter, we will not issue an end-of-quarter box office update for Q4.

We have not made any final decisions, yet on new box office metrics, but we'll make sure to communicate any future changes to you, as needed. We welcome your feedback on the changes we've already made or any potential ideas for changes going forward. With that, let me turn it over to Joe to go through some of our financial highlights from the quarter.

Thanks, Rich. We had another strong quarter across our financials with total revenue of $80.7 million, and adjusted EPS of $0.26. We also generated roughly $30 million of free cash flow. Total revenues increased by 20% compared to the third quarter last year, driven by growth in our recurring revenues, as well as additional sales-type lease system installations. We expanded our commercial network by 26% over last 12 months, and this resulted in continued growth in our recurring revenues.

The joint revenue sharing and DMR revenue lines both grew over 30% this quarter versus last year to a combined $38.4 million in revenues in Q3. Importantly, the high margin on these line items of 70% for joint revenue sharing arrangements and 60%-plus for DMR allowed for a large portion of this revenue to drop to the bottom line. The DMR rate gross margin rate was slightly lower this quarter compared to the same period last year, as we incurred some additional expenses related to film press.

In addition, we had a strong quarter for sales-type lease installations, which generated $21.9 million of revenues at a 50% gross margin, helping to drive our top and bottom line growth. We installed 14 new sales-type systems and three upgrades. Adding these to the 14 new and two upgraded JV theaters that we installed in Q3 our total installations for the quarter were 28 new installations, and five upgrades.

As Rich mentioned earlier, we also signed deals this quarter for 41 theaters compared to 30 signings during the same time frame last year, which demonstrates the continued demand for IMAX systems globally. As you saw in our press release this morning, we are on track to meet our previously provided guidance of approximately 110 new theater installations in 2012. This implies expected new installations of 46 in Q4, with approximately 14 expected to be sales-type lease arrangements.

Also, we want to note that of the Q4 installations, we expect 11 to be JV hybrid installs. We have also issued guidance that we expect a total of 110 to 125 new installations for 2013, with the mix skewing towards JVs for that year. As Rich mentioned, our 2012 and 2013 installation guidance are being provided under a new definition that will be used--that we will be using going forward. Instead of only guiding from backlog, we are now giving guidance on the total expected installs for the year, including backlog and projected sign and installs.

Moving on to our operating expenses, we were able to come in lower this quarter than originally anticipated.

SG&A, excluding stock-based comp, came in at $16.6 million, which was in line with last quarter, and lower than last year's $18.9 million. But remember, last year's SG&A was artificially high as a result of the $4.1 million foreign exchange charge. For the full year 2012, we now expect SG&A from operations, excluding stock-based comp, to be about $65 million to $67 million, which implies Q4 SG&A of about $16 million to $18 million. This guidance is for less expenses than what we had given in Q2, due to timing, and it also reflects greater discipline with regard to certain discretionary spending items.

We continue to expect stock-based compensation for the year to come in at around $13 million. Q3 R&D was $2.5 million, including about $425,000 of amortization. We're guiding to $12 million to $14 million for the full year, including about $2 million of amortization, which implies Q4 R&D of about $4 million to $6 million. Q3 R&D was lower than expected due to timing of the spending on some of our laser development.

In terms of tax, we continue to estimate an effective tax rate of approximately 31% for the full year 2012, which includes expected cash taxes of only $3 million to $4 million because of the NOLs we still have.

While we demonstrated strong and revenue earnings growth this quarter, even more importantly this robust growth was translated into cash flows. During the quarter we generated free cash flow of about $30 million, of which we used $25 million to continue to pay down our bank debt, which further improves our already healthy balance sheet. We believe that this paydown helps us ensure we will have maximum financial flexibility to continue to support the Company's anticipated strong growth going forward. With that, I will turn it over to Rich for closing remarks.

Thanks, Joe. We've created a truly differentiated brand and entertainment experience that is being embraced by exhibitors, studios, and most importantly, by moviegoers around the world. To deliver continued long-term success, we'll remain focused on executing against all aspects of our business, including expanding our network globally, selecting the best possible film portfolio and controlling expenses in order to maximize the scalability in our business. This quarter's signings and installs, along with the strong financial results, are further evidence that we've rounded a corner, and are on the path towards a period of sustained growth. With that we'll open it up to any of your questions.

Thank you. (Operator Instructions). We will now take our first question. The first question comes from Townsend Buckles of JPMorgan. Please, go ahead.

Thanks, a few questions. First for Joe, on your higher DMR fee and film prints in the quarter surrounding Dark Knight, should we expect to see this dynamic for The Hobbit and your bigger releases, down the road and are you planning to utilize your institutional screens more often?

And then for Rich, good to see the acceleration in installs for 2013. Can you give us a rough sense of how these break down geographically, and where western Europe around Latin America fit in your outlook? Thanks.

I'll answer my question first, Townsend. It's Rich. One of the things that happened in 2012 is that we had more signings than we had originally budgeted, and some of those were even going into 2012. What happened is because our backlog is more new-build weighted than it had been in previous years, some of the 2012 slipped into 2013.

What you're seeing in 2013 is a continuation of some of the trends we've had before, a lot of installs in China. I think you'll see North America, where we had a very strong quarter, a lot in North America. Europe, as I said, has gotten off to a strong start, so I think you'll see a lot going on in Europe. I think Latin America, as I mentioned, Townsend, is a bit of a longer term project. Again, not to belabor the point, but we have a partner in Latin America and 2012 was sort of a transitional year where we participated alongside the partner. We got a lot of traction in terms of relationships, but not that much in terms of actual signed deals. I think in 2013, we think that will materialize. Again, I think Russia will also be fairly strong from an install point of view.

I'll give you a sort of a broad overview, and then Joe can fill in the details on the film print issue. I think we don't expect to see the same kind of movement on film prints, overall. What happened during the quarter was in Spiderman and The Dark Knight Rises. We played a role in financing the film prints. It skewed some of the margins in the way they were reported during the quarter. Now, in future quarters there are instances where it will be involved, but I don't think you should look at the quarter as ongoing guidance for new levels.

Do you want to add anything?

No, Rich. I would agree with that. I don't think that that's a blueprint for the future, for sure.

Okay, thanks.

In terms of your the second part of that question regarding constitutional sites, I think the film has to be the right film for those type of sites so The Dark Knight lends itself well. We've played Harry Potter in some institutional sites. The Hobbit, maybe, in certain institutional sites. It really depends upon the film that's being released whether it will go into those sites or not.

Michelle, next question.

Thank you. The next question comes from Drew Borst of Goldman Sachs. Please, go ahead.

Great. Thanks. Guys, when I look at your JV revenue sharing revenue that was in the quarter, when you do that as a percent of the global box office it looked like it was a little bit lower in the third quarter than it has been in the first half of the year. So I think, by my numbers, it was about 7.5% in the third quarter and it was closer to 9% to 9.5%. Can you explain what was going on there?

I think you have a couple of things going on. You know, in releasing The Dark Knight, we had over 100 print theaters, which are not JV theaters, and they generated significant volume. So if you're trying to apply a historical rate, it really depends upon where did the box office land. Was it on a rent share theater, or was it on a sales-type lease, or a film theater? And I think it had more to do with mix than anything else.

And to add to that, as I mentioned, The Dark Knight is one of the films we were involved in financing the prints. You have to remember that Chris Nolan filmed it with IMAX theaters, and it really took advantage of our aspect ratio in the IMAX film theaters. So those were sort of over-indexed. But again, it shows up on a different line, as Joe said. Because we subsidize some of the print cost, we got extra revenues in a number of those theaters. When you blend it all together, we ended up in a very good place. It just showed up on a different line.

Yes. I think if you did the math on our DMR percentage this quarter, you'll see it's higher than the norm.

Okay. And then just quickly could you give us the breakdown of the box office between domestic and international?

Yes, just give me a second. For the quarter domestic was $293 million. International was $339 million, and the aggregate was roughly $312 million.

He means gross boxes, Joe.

Oh, gross box office. I'm sorry. We did $173.2 million versus last year of $149.5 million.

And how much of that was international and how much was domestic?

Let's see, international was $75.9 million versus $77 million, last year. $97.3 million domestic versus $72.5 million, last year.

Next question, Michelle.

Thank you. The next question comes from Ben Mogil of Stifel. Please, go ahead.

Hi. Thanks for taking the call. Two questions, in terms of the backlog -- sorry, in terms of the installation guidance you are giving for next year, can you, maybe, break down how much of it is out of existing backlog, and how much of it your expectations around screen signings in the year?

Secondly, the DMR percentage, the percentage of the box office was like 14.6% much higher than we've seen in past quarters. Are we seeing the new splits in China, coupled with some China local films? And maybe talk a little bit about some sort of commentary around that if you can.

I think you are seeing somewhat of the impact on splits in China. In fact, to remind all those on the call, because the take rate in China used to be 13% to 15% for the studios, rather than 25%, which it is today, we were able to push our share of the box office somewhat higher. Where it used to be 6.5%, I think right now we're settling on the 9% to 10% range, and I would model that on a go-forward basis in thinking about it.

On the other hand, during the quarter, its impact was a little more limited, because again, films were on played back-to-back with each other, such as Spiderman and The Dark Knight. That accounted for some of it. I don't know if you want to add anything, Joe.

The only other piece I'll add, Ben, is don't forget that we had a higher split because of the print deal. You did have a higher top line. You did have some costs going against that.

Go ahead, Ben. Sorry.

Thanks. And then on the issue with the backlog, the installation guidance for next year. Do you think you can parse out the 100 lists you use, the 125 to make it easy, how much is roughly out of backlog, and how much is out of screen signings?

I think, Ben, we're not going to do that. We're going to look at it as a whole. We didn't do that this quarter. Essentially, what happens every year is something slipped out of backlog and slipped into the next year, which is what I mentioned happened this year. And then there's a certain amount of sign and installs. I don't think it's that useful to do it, although I'll give you a general comment, which is the number out of backlog is certainly consistent with what it was in 2012.

Okay. And then just lastly, your ASP on your system sales was significantly higher than we've seen in the last couple of quarters. Any kind of commentary you can give around that?

It really depends upon the types of deals you're doing, and what margins they bring to the table. Some are a little higher than others.

Including some of the hybrids, which are in there. Yes. Right.

Yes.

Next question please, Michelle.

The next question comes from James Marsh of Piper Jaffray. Please, go ahead.

Thanks. Good morning. Two quick questions, here. First, I was hoping you guys could discuss a little bit about the Dolby Atmos initiative, I think, Life of Pi will be the third film in that format for lack of a better term. Could you talk a little bit about what they're actually doing there? Is it just a remix or is it an up conversion? And maybe if you could talk a little bit about partnering with some of the generic large formats, and how that might impact the competitive environment.

And then the second question just relates to screen guidance for 2013. Does it assume any laser installs, and just to be clear, when you talk about true installs versus digital upgrade, I assume a laser upgrade would be a true install. If you know what I mean.

Yes, it would be, James. Because you're paying full [bode] rather than a revenue-neutral kind of deal. But, no, 2013 guidance does not include any laser installs. If that happens, that would be gravy but not at that --.

Nor are any other upgrades. That number is pure of any--there's no upgrades in there, laser or digital.

And in terms of Dolby Atmos, I think Dolby has done a good job in introducing a new product. We've done -- our technical people have taken a look at what they're doing. While we respect what they're doing, the Dolby Atmos system was not really designed for filmmakers, so we think that the specs that we use in our IMAX system are superior to what is being done with Dolby Atmos. And a number of the leading sound experts tend to agree with us. That's not -- I think it's a very good system; and I think it's a move forward; and I think a number of people in the sound community are impressed with what they've done.

In terms of teaming off with existing PLFs, I think IMAX, James, is an end-to-end solution, as you know very well. It starts with whether the image is captured by our camera or translated by our proprietary DMR technology. It has to do with the relationship of the filmmakers to the movie. It has to do with the relationship of the studio to the marketing. More and more we're part of the DNA of that. It has to do with the integrated solution on the end in terms of image, sound, and marketing and brand and experience. And I don't think the fact that an operated sound system is partnering with a PLF is a particularly great threat to us. Greg, do you want to add anything?

Yes. I think the key thing is that we continue to have a direct relationship with the filmmakers. That includes the sound design of the IMAX release. We rebalance, remix every sound track specifically for the IMAX system, with the hands-on partnership of our filmmaker partners or their sound designer or mixer. Again, Rich is right. The Dolby Atmos group has done a nice job of marketing their system, but our actual behind-the-scenes direct involvement with the filmmakers, itself is unique relationship that I don't believe anybody else has.

Next question, please, Michelle.

Thank you. The next question comes from Eric Handler of MKM Partners. Please go ahead.

Yes, thanks for taking my question. Just looking at your free cash flow, you've generated about $30 million for the first three-quarters of this, so let's call it about 30% of adjusted EBITDA and roughly 100% of your net income. Going forward is that something that is sustainable, or how should we think about your free cash flow generation?

I think, Eric, it's really going to be dependent upon the level of investments that we're making in our JV theaters. You know, if we get a lot of JV signings in a particular period, obviously, it's going to lower free cash flow. But if you're at a steady state, given the critical mass that we've now achieved, I would anticipate that trend continuing forward.

I mean, obviously we were very pleased with the free cash flow during the quarter. That was part of my remarks about scalability. However, doing joint ventures that have IRRs that are quite attractive are not a bad thing for us. I would say, our primary goal is really is to continue to grow the network and grow recurring revenues. When that doesn't happen, we'll have free cash flow and we'll try to pull it in other attractive ways.

Next question, please, Michelle.

Thank you. The next question comes from Richard Ingrassia of ROTH Capital Partners. Please, go ahead.

Thanks. Good morning, everybody. A question for Rich, and a question for Joe. Rich, can you talk generally about how small and medium-sized regional chains in the US view IMAX, these days, and how the value proposition and the economics might differ in the smaller markets?

And Joe, I know this is difficult to do, but if you're able to normalize for box office in some way, do you have a sense for where gross margins go ultimately?

By my estimates, it looks like 60% could be consistently achievable by the end of next year. I wonder how you guys see it.

I'll answer the first question, and then we have some cutout, here, so please repeat the second question after I'm done. In terms of the small-market exhibitors, I think they view us quite positively. I think, a lot of the research, Rich, I don't believe yours, but other research thought we were done in North America two years ago, and our sales have been very strong in North America. As a matter of fact, we recently did a 10 theater deal with Frank Theatres; for Guzzo during the quarter, we've signed for three more in Montreal.

And then Warren Theatres, which is a regional exhibitor in Wichita, Kansas and Oklahoma City, is one of the most successful of our -- on a first-screen basis in the country. And I think what the small exhibitors have found is that having IMAX having in a smaller area, I don't want to overstate this point, but it's analogous, in a way, of having a baseball team or some kind of a sport franchise. Meaning that there is less competition for entertainment dollars in smaller markets. And I think it brings even more prestige to a local multiplex.

The other thing is that the smaller operators tend to be more focused on marketing. To the bigger chains, it's more difficult to have an uniform marketing strategy. So that theaters performing extremely well.

As a matter of fact, to use Guzzo theatres in Quebec as an example, they've got a second screen in one of their complexes, one is in French and one is in English. The results were so encouraging that they're doing it again in another complex, and there is no holding them back. So I think a combination of their marketing ability, the nature of their markets, and their enthusiasm has been a promising development for us. And again, the second question which we lost, Rich.

Sorry about that. It was for Joe. I know this was tough, but I was trying to get some sense for how you look at gross margins down the road, so an ultimate objective, if you have one. I know it's difficult, because the influence of box office. But by my estimates, it looks like 60%-plus are achievable by the end of next year. And I wonder if that sounds in the ballpark.

The only thing I'll comment on, Rich, and it will really depend on your model, is if you look at the rent-share margins and if you just assume a million to a box, it's inherently an 80% margin business. Depending on how much of that is in your mix, that will drive you most likely higher. In the DMR business, that's obviously scalable. The more units you get online, the better your profile. You know, if you took $1.2 million at roughly 500 screens, you're sitting in a mid to low 60% margin, today. But that number continues to grow as we add more units. Again, depending on your mix, in terms of how much --what you're assuming in terms of network growth is really going to drive where your margins land.

Next question, please, Michelle.

Thank you. The next questions comes from Vasily Karasyov of Susquehanna Financial Group. Please, go ahead.

Good morning, Rich. Vaily Karasyov from Susquehanna. Rich, I have a question about China. Did you get the impression that what they did with Spiderman and The Dark Knight Rises was a one-off, or is that a policy going forward?

And then the related question is how likely do you see other territories, which you see as potential, as growth territories to adopt something similar to what China did to those two movies? Thank you.

First of all, the second part of your questions on territories, I think there really is no chance that happens. Because in China there's government regulation, which controls when films can open. That kind of regulation does not exist anywhere in the world other than in China. I don't really see that as an issue. In terms of your question whether it's a one-off or a policy, you know, it's somewhere in the middle.

Which, I think, it's not an one-off because there are others where it happened also, the Borne movie and Total Recall ran at the same time. I think in the short run, you are probably going to see a little bit more of it.

What I think happened was in the first half of 2012, the non-Chinese box office, especially the Hollywood box office, was extremely high, it was in the 75% range. And Chinese--the Chinese government wanted it to be closer to 50/50. I think what they decided to do was to try and open more slots for Chinese movies to play. One way they could have more slots was to take the US movies and bunch them around certain dates. I don't believe they intended to hurt the box office of the US movies, as much as they intended to provide more playing time for the Chinese movies.

I was over there about a couple of weeks ago or a month ago, and I had a lot of discussions on this. I think, in fact, the result that it did hurt the box office really was not good for a lot of constituencies in China, including China film, which imports the film that gets paid on the importation. Including the exhibitors, which, obviously, were not happy that the box office on those films was done. But most importantly, I think less people were going into malls then were going into movie theaters. Given the Chinese government's objective of keeping the internal economy growing, and the consumer economy growing, my personal opinion is at the end of the day, that's going to be more important than the particular blend between Chinese and US box office. So while that's a short-term policy, most of the people I talked to over there felt that it was not going to be a long-term policy.

Next question, Michelle.

Thank you. The next question comes from Aravinda Galappatthige of Canaccord Genuity. Please, go ahead.

Good morning. Thanks, very much, for taking my question. A couple of quick questions. First of all, on the signings front, on Investor Day in June you gave some pretty good visibility with respect to your pipeline. I think you mentioned about 91 deals under negotiation. Understanding that you may not want to give specific numbers, is there a general comment you could make about the strength of the pipeline on a relative basis?

And in my question second, just a clarification, Joe, I think you mentioned 46 installations for Q4. I think you said a number of for systems sales. I missed that.

Systems sales was 14.

Thanks.

The deal pipeline, Aravinda, remains quite strong. Every month we have a worldwide internal call where we go to the regions, and we see what their prospects are in the area. It's certainly consistent with the other quarters. We haven't seen any slowdown whatsoever, so I feel pretty good about the tone of our business.

Next question please, Michelle.

Thank you. The next question comes from Steven Frankel of Doherty & Company. Please, go ahead.

Good morning. Rich, normally your international screens significantly outperform the domestic screens on a PSA basis. This quarter that percentage of over-performance was a lot smaller. I wonder if you might try to explain why that was, and have you seen PSAs decline in Russia and China, which would help to drive a lot of out-performance in past quarters.

Steve, the answer is pretty simple. It's China. The issue we were just talking about. You know, the fact that The Dark Knight Rises and Spiderman ran on top of each other, in China. If you back that out and you look at the rest of the world, the trends were very consistent with what we have seen in the past. So I wouldn't make much of a trend out of that. The other thing would be The Dark Knight Rises did particularly well in the US because of the film prints.

Next question please, Michelle.

Thank you. The next question comes from Daniel Ernst of Hudson Square Research. Please, go ahead.

Good morning. Thanks for taking my call. I have an observation which leads into a question for Rich. Rich, in the past, you've talked about the big drivers of your business being the size of the network, growing the network and putting compelling content into that network. And on the side of the business that is building the network, you've done a great job. You've invested in JVs. You've created a new company in China, and you produced a high quality product from, as you say, from the production level towards your management of the network, and the QA process around that. And just putting up good metrics, which the operators find compelling, and sign more deals with you.

On the content side, you talked a lot about how more and more of Hollywood are embracing your format, and people like Mendes and Nolan. And they are increasingly shooting bits of their film, larger segments of their film, in IMAX , with IMAX cameras, or in the IMAX format. And so that's great. But it seems to me that side of the business, the content side of the business, has happened organically. You have a great product and people are drawn to it.

I am wondering, is there is an opportunity for IMAX, or you would consider an opportunity at this stage of your inflection point in building a big network, of actually taking a more active role in what content shows up Potentially, even investing in content to ensure that IMAX is the format of choice, or investing in more camera production so that there is a greater supply of that?

Can you comment on your views on getting higher quality content, more higher quality content into the growing network? Thanks.

First of all, thanks for your comments about network growth. Again, I want to reiterate some of the comments I made on the call about our portfolio approach. I think I know mentioned it at investor day. I think I've done it at one of these calls.

We really have a different way of budgeting, in a sense, than we used to. We do a top-down way rather than a bottoms-up. If you look at the portfolio of films over the last three or four years, they've been incredibly consistent around the $1.2 million per screen. If you look at this year, we're about $900,000 through the third quarter, so we're tracking specifically to that. I guess as a way of background, I think that when you look at the portfolio, it's the movie business, so you get films like Avengers that break out in a certain way, and then you get a number of films that under perform. It's [my] way of saying, I think there is limited bands that you can have an impact on. From my point of view, using capital in a material way isn't going to change those bands. You know, with that said I think where we are using our capital is more on IMAX DNA, including investing in a new generation of cameras, and trying to spur more unique differentiations to IMAX. Maybe Greg wants to talk a little bit more about that.

First of all, absolutely correct terms of the amount of effort we're spending to expand our the diversification of our camera packages. Some people want to shoot movies with 2D. Some people want to shoot movies with 3 D. Some people want to shoot movies like Chris Nolan in film. Some people want to shoot in digital. It is our role to be able to provide the technology for all of our core partners.

On top of that we--just like we don't want to have an IMAX theater on every street corner, we don't want every single movie to have IMAX shot with IMAX cameras. We're very, very selective about who we work with, and we're very selective about who we give the crown jewels of our image capture system to.

Right now, if we wanted to we could probably shoot six to eight movies a year with IMAX cameras, and that's not something we want to do. We want to focus on being very selective about who uses our camera, and we want to be integrated into the design and DNA of the movie when, in fact, they do use our camera. That's very much been the case with, obviously, a filmmaker like Chris Nolan. It's very much the case with The Hunger Games group, on Catching Fire, and J. J. Abrams with the last Star Trek movie, or the latest Star Trek movie has done that, as well, too. It really goes back to our relationship with the core filmmakers that we tend to partner with, and being quite selective about how we do that. But once we're in, we're usually all in.

Next question, please, Michelle.

Thank you. The next question comes from Colin Moore of Credit Suisse. Please, go ahead.

Great. Thanks, and good morning. Just a two-part question on China. Just curious, I know it's still early stages, if you're seeing any impact from the gradual GMAX launch, if it's still more of a supplement, just or any thoughts on that market.

And maybe sorry, if I missed this, any thoughts around the economics of your converting additional China films, and what kind of opportunity that might provide. Thank you.

In terms of your first question, I think the name, by the way, is China Giant Screen, now, not GMAX, but same thing. We really haven't noticed a material effect from them. In fact, we're in a number of negotiations in China for various transactions. You know, really haven't seen much of an impact. I go back to an answer I gave earlier, which is the end-to-end solution point that IMAX captures the image, converts the image, has proprietary technology, the brand, the marketing. For example, one of the things that I learned when I was in China, which was quite interesting on my recent trip, is that China Giant Screen is more of a consortium than a company.

So if you're system goes down there is no one to call. You have to call the projector manufacturer. You have to call the server manufacturer. It could be a sound system problem. It's not really an integrated thing. Another thing that I learned, which will make a lot of sense to you is IMAX has a central control facility where on day 100 the picture looks the same as it did as on day one, because we monitor the theaters in real-time, and we ensure the quality experience is upheld.

The effort in China is not the same. People can show something on day one, and it could look very different on day 100, or day 200, or whatever it is. Again, our end-to-end solution and our commitment to quality I think is a huge differentiator. And I think that not only the theater operators but, more importantly, the consumers understand that.

As a matter of fact, even though there's not many China Giant Screens open, so you don't want to overly make too much of this. But our per screen average is about three times what it is there.

A funny slight off-topic anecdote is I was interviewed a lot when I was in China, particularly, by people over the internet asking me about it. When I gave my answer, and the interview was over the reporters and this happened maybe three times would say to me sorry I had to ask that question, but IMAX is in a league of its own. I think, given how important the Internet there, I just don't think there is any buzz around it, and I don't think it's that important. I think Greg wanted to add something else --.

I was just going to talk about the Chinese films you mentioned. We see that as a big part of our business going forward in China using local language films to not only fill in the gaps on the release schedule where there is not a Hollywood film, but also in terms of building relationships with filmmakers. It goes back to what we've done in the United States, which we're going to start doing, and have begun to do in China, including, I think, in the next year or so, potentially, seeing a Chinese movie that features certain IMAX DNA in the production process. I think you guys know in the last month, we announced deal with four pictures with Huayi Bros. Tai Chi 0, Tai Chi Hero, which, by the way, is opening up today in China one week early, exclusively in IMAX. Then we have the Feng Xiaogang movie, 1942, which is going to open at some towards point in the year; and then the Jackie Chan movie in December, CZ12.

So the Chinese DMR business is very important to us, and our exhibitor partners, and our relationship with moviegoers. And they're recognizing in China that our brand means something. And that we're also able like we did with Flying Swords of Dragon Gate to take those movies from the Chinese market, and become the, for lack for a better expression, Good Housekeeping Seal of Approval that takes them and helps them get distribution in the US and outside of China, which is something we're also planning on doing in other markets, including Indian-language films.

Next question, please, Michelle.

Thank you. The next question comes from Jim Goss of Barrington Research. Please, go ahead.

Thank you. A couple of things. One is that your--one of the of the efforts you've been making is to improve your flexibility in terms of the contracts, so that you can maybe cut a movie short if it's not working, let it run if it is working. I know you have your legal person there. Perhaps, you can talk about how frequently you made use of the flexibility you've built into the contracts this year, and how that went in dealing with the studios in those terms.

Another area, with the discussion that has been considerable about China, it does seem to be of some concern that they would want to create a limiting factor which reduces your flexibility in that particular market. On the other hand, if you assert yourself to get into the other 50% with the Chinese DMR films, perhaps, that's part of the response. But in a broader sense, does that also change your viewpoint about how big you want China to be as part of the total global IMAX?

And is that why you would want to step up Latin America and Europe, or are those just side areas?

On your first one, in terms of film flexibility, Jim, it's less a contractual issue than it is a practical issue. And I think there is a long history of relationships between studios and exhibitors. Often studios and often exhibitors, and I think a studio has no reason to be punitive if the film really isn't working. They tend to be somewhat flexible in letting us play something else. We have very good relationships with the studios, and maybe equally, or more importantly, with the filmmakers.

You know, I'm not going to go through title and verse of this year, but certainly we went into the year without The Hunger Games. And that became a big performer for us. And we went into the year without Avengers, and, in fact, Avengers was an extremely strong performer. In that case, there were other films in the slots, and the other exhibitors conceded to get out of the way in a number of theaters to help it out. It's just much more on an informal basis.

By way of example only, because this, in fact, wasn't the case this year, but if Paramount gets out of the way, and let's Warner play one of its film that is doing very well, then in another instance, Warner will get out of its way and let Paramount play one of its films. There's no doubt that it's been much more built into the model. Our general counselor, who does happen to be with us, doesn't have to answer this question, because it's more of a course of dealing than it is a matter of legal things.

In terms of China, you know, people forget that this is also the year that China increased it's quota by 14 films using the word IMAX in its press release from the government. Again, as you may remember, Jim, as you may know one of my favorite sayings is it's never as good as it looks or as bad as it seems. When we did 14 films I didn't when we got that loophole, that provision in the import quotas, I didn't run around saying, "Oh, my God, every film in China is going to be an IMAX film."

With that said, I don't think that what you saw one or two times in China is the policy for the rest of time. China is not a model [in place]. There are lots of voices, just like there are in the US, and there are lots of competing interests. So I think some of the short-term issues you're seeing in China will play themselves out over time.

You know, again, I know it seems like the dark ages, but it was only six months ago that they changed the splits and they allowed the 14 extra films in, which were over the top good for IMAX. So, no, nothing is really soured me at all in the Chinese market. If you went back a year ago, and you told me our film split would be 50% higher than what we budgeted in the beginning of year, and 14 films could only get in if they were in IMAX and 3D, and there would be some challenges like the doubling up of movies, I would say that's consistent with my long-term view on China. That some things are good. Some things are bad, but in general our brand is really important there.

I think, also, you should know the fact that we're helping export Chinese films, like Greg was talking about Flying Swords earlier, which is playing in the US. As a matter-of-fact, the MPA is hosting a Chinese delegation next week, here, and we're a big part of that. In my meetings in China, the government officials made it abundantly clear that they really appreciated our efforts to help export Chinese films. I remain extremely bullish on the Chinese market. And things like Latin America, they're just new opportunities for us, western Europe and under penetrated markets. I think that's a creative non-replacing.

I think we have time for one more short question.

Thank you. The last question will come from Martin Pyykkonen of Wedge Partners. Please, go ahead.

Thanks. Just two quick things, one for Rich. On Latin American again, looking into next year, I know the timing is difficult, but I want to compare and contrast to China, which post Avatar opened up like a big fire hose in terms of the deal flow. Should we be thinking of Latin America more as a linear, smaller deals and so forth, when they start to develop, as opposed to something that's more of a big onslaught and back end loaded I just wanted, as best you can characterize that.

And just quickly for Joe you got the question on gross margin that I was going to ask about JV gross margin. The terminal or ultimate value, if you will, assuming mix of new screen deals over the next few years as predominantly JVs, outside of places like Russia. What should how should we be thinking from a modeling standpoint of the JV segment, gross margin kind of ultimate/terminal kind of value. Thanks.

In terms of Latin America, we have made a lot of progress beneath the surface. There are a number of negotiations going on, it's just that they haven't come to fruition as quickly as I would have hoped. If you remember, Martin, I was always a little cautious on how quickly it would happen. I always said it was a 2013 issue rather than a 2012. So a little progress isn't--hasn't manifested itself with a lot of signings. We have made an awful lot of progress.

I think it will be more linear than China. I don't think--it would surprise me if this was 50 theater deal in Latin America. Most of Latin America is Brazil, as you know. But I don't think the structure of the market is that way, or the structure of the film industry is that way. On the very positive side, our theaters that we opened, including the newest one in Brazil, in Sao Paulo, are incredibly successful. And the one in So Paulo, the multiplex, is the number one multiplex in all of Brazil. And I think our theater has been tracking to be the number one theater in all of Brazil. Certainly, we have the characteristics of a reference theater, similar to what we had in China.

However, you know, one important fact, and this is actually going to add to the ambiguity, because you could take it both ways. In China, we have 400 zones. In Latin America we have 75 zones. That would really pour cold water on it. But I would like to remind you when we started our efforts in China there were 90 zones. It went so well that eventually we grew to the 400 zones. For the short term, I think it's going to be more linear, but over time let's see where it goes.

In terms of the JV margins, Martin, if you assume a level of box office of $1.2 million, you're going to land at about an 80% margin. If you look at our numbers this morning when we released them, you'll see if you add back the launch expenses that we incurred in the quarter, you're going to land pretty close to that level. So you know, I think, as you move forward, and if you're modeling at about $1.2 million, that's where you should land, an then you overlay any launch expenses on top of that. Given the critical mass of the network on the JV side even, launch expenses over time will become less of a draw down on our margins as the network gets wider.

Thank you all for being on the call. I think in my closing remarks, I would just like to note that since 2008 our commercial network has grown by about four times. And you know, with that came some necessary SG&A growth, including the $8 million we spent in China to build a whole company in China to service that market. We, as a management team, recently had our management meeting, and I think we're highly focused, at the moment, in terms of how to get more out of the same resources, and how to really prove the scalability of the business. I think when you're growing four times in that period of time, you kind of throw dollars, and you throw bodies just to make sure you're making sure you're doing a very good job in servicing your customers, and particularly the end customer.

I think we've now been able to step back a little bit and take a breath, and look at this issue of scalability. What makes me particularly encouraged about the first three quarters of this year, but really this quarter where it manifests itself, is the scalability has really turned into profits and free cash flow. And that's the direction we're following going forward. With that, thank you all for your support.

Ladies and gentlemen, this does conclude the conference call for today. You may now disconnect your line and have a great day.